Buying Momentum Falls Flat

Articles From: Briefing.com
Website: Briefing.com

By:

Chief Market Analyst

The momentum of the rally the stock market enjoyed yesterday has not carried over this morning. Instead, it has gone flat. There is no momentum at the moment.

The ostensible reasons for the lack of carryover momentum include the following:

  • Disappointing earnings reports from Micron (MU) and CarMax (KMX)
  • Congress being at a standstill on the government funding bill due to a dispute regarding an immigration amendment
  • Influential hedge fund manager David Tepper telling CNBC that he is leaning short the equity market because he believes central banks will keep tightening and that rates will remain high for a while
  • Better than expected Q3 GDP and weekly initial claims data that has fueled concerns about Fed tightening
  • The S&P 500 meeting resistance at its 50-day moving average (3,883)
  • Waning conviction as market participants bow out to enjoy other holiday pursuits

Currently, the S&P 500 futures are down 34 points and are trading 0.9% below fair value, the Nasdaq 100 futures are down 137 points and are trading 1.2% below fair value, and the Dow Jones Industrial Average futures are down 220 points and are trading 0.7% below fair value.

The lack of follow through buying interest is consistent with the broader downtrend that has prevailed this year. Yes, there have been periods when big gains have been registered, but those big gains have been sold into in a manner that is consistent with a bear market governed by economic and earnings growth concerns.

Micron and CarMax played into those concerns perfectly when reporting their results after yesterday’s close. To that end, Micron said it will cut approximately 10% of its staff in response to challenging industry conditions and CarMax said unit sales suffered due to affordability pressures and that it expects headwinds to remain “due to widespread inflationary pressures, climbing interest rates, and low consumer confidence.”

Yesterday’s December Consumer Confidence report was stronger than expected, yet CarMax’s commentary underscores that consumers say one thing and often do another. In other words, soft survey data is not to be trusted as much as hard economic data and the hard economic data of late suggests consumer spending is weakening.

That wasn’t the case in the third quarter, however. The third estimate for Q3 GDP revealed that consumer spending increased 2.3%, versus 1.7% in the second estimate, and 2.0% in the second quarter. That upward revision helped drive an upward revision for Q3 GDP growth to 3.2% (Briefing.com consensus 2.9%) from the second estimate of 2.9%. The GDP Price Deflator was revised up to 4.4% (Briefing.com consensus 4.3%) from 4.3%.

The key takeaway from the report is that growth in the third quarter was stronger than previously expected and above potential, which is also why the Fed continued to raise rates aggressively in the third quarter.

The latest weekly initial claims report won’t silence the concerns about future Fed tightening either. Initial claims for the week ending December 17 increased by 2,000 to 216,000 (Briefing.com consensus 225,000). Continuing claims for the week ending December 10 decreased by 6,000 to 1.672 million.

The key takeaway from the report is that initial claims remain at remarkably low levels associated with a tight labor market. In turn, a tight labor market will remain associated with more Fed tightening.

The 2-yr note yield, at 4.21% ahead of the report, is up two basis points now to 4.24% and the 10-yr note yield, at 3.65% ahead of the report, is back to unchanged at 3.68%.

Those aren’t big moves per se, but like stocks, Treasuries have seen a loss of buying momentum.

Originally Posted December 22, 2022 – Buying momentum falls flat

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